CGT Main Residence Exemption for Foreign Residents … enjoy it while it lasts
Background
On 9 May 2017, the Federal Government announced it would “deny… foreign … residents access to the Capital Gains Tax (CGT) main residence exemption from… 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019…”.[1]
On 8 February 2019, a bill[2] was introduced to Parliament to remove the entitlement to the CGT main residence exemption for foreign residents. A revised bill[3] was introduced to Parliament on 23 October 2019 and subsequently enacted into law on 12 December 2019.[4]
Broadly, the effect of the changes is that a foreign resident will no longer qualify for the CGT main residence exemption unless both of the following criteria (referred to as the “Life Events Test”) are satisfied:
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they have been a foreign resident for a continuous period of six years or less; and
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during that time, one of the following “life events” occurred:
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the foreign resident or their spouse, or their child under 18, had a terminal medical condition;[5]
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their spouse, or their child under 18, died;
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the CGT event involved the distribution of assets between the foreign resident and their spouse as a result of their divorce, separation or similar maintenance agreements.[6]
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A person who has been a foreign resident for a continuous period of more than six years will be an “Excluded Foreign Resident”. Excluded Foreign Residents are unable to utilise the CGT main residence exemption.
Who is affected?
Any person that is a foreign resident at the time they sell residential property in Australia which they previously used as their main residence will be affected. A number of Australian citizens who are expatriate workers overseas may be affected. Australian tax residents and temporary residents will still be able to access the main residence exemption.
Transitional provisions apply, which allow foreign residents who owned their home as at 9 May 2017 to claim the main residence exemption, provided that they sell the property on or before 30 June 2020.[7]
What are the options?
Broadly, if you are a foreign resident affected by the changes, you have 3 options:
1. sell the property on or before 30 June 2020 – if you do so, you will be entitled to the main residence exemption if the property was acquired before 7.30pm (ACT time) on 9 May 2017.
The normal rules for absences from main residences will apply, namely:
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you may treat the property as your main residence even if you were actually living overseas.
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if you rented out the property, then you can treat the property as your main residence during your absence for a maximum period of 6 years.[8] If you rented out the property for more than 6 years, then the main residence exemption would apply only in part, meaning that there could be a taxable capital gain.
If there is a taxable capital gain you may be able to reduce it by utilising the CGT discount in part. Individuals who are Australian tax residents and who have held a CGT asset for more than 12 months before the relevant CGT Event are able to access a CGT discount of 50%. Foreign residents have not been entitled to the full CGT discount since 8 May 2012. A foreign resident will, nevertheless, be entitled to a reduced CGT discount[9] where a CGT event happens to their property after 8 May 2012 and:
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they acquired the property before that date, or
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they had a period of Australian residency after that date.
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2. sell the property at any time after resuming Australian residency – if you do so, you should be entitled to the main residence exemption. It is a question of fact whether you have re-established your residency in Australia and you should seek taxation advice if you are in doubt as to your residency status.
Paragraph 1.24 of the Explanatory Memorandum to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (Cth)[10] provides that the general anti-avoidance rules in Part IVA may be applied by the Commissioner to deny the main residence exemption where:
… based on an objective consideration by the Commissioner, the Commissioner determines that an arrangement has been entered into by a person for the sole or dominant purpose of enabling that person or another person to obtain the main residence exemption.
As noted above in Option 1, if you have rented out your property for more than 6 years, then the main residence exemption will only apply in part. There may remain a taxable capital gain which an adjusted CGT discount could help to further reduce.[11]
3. sell the property after 30 June 2020, while a foreign resident – if you do so, you will not be entitled to any main residence exemption unless you satisfy the Life Events Test.
As noted in Option 1, you may be able to reduce your capital gain by applying an adjusted CGT discount.[12]
Impact on Deceased Estates
The changes to the law will also impact surviving joint tenants, executors and beneficiaries of deceased estates.
Broadly, so long as the deceased was not an Excluded Foreign Resident when they died and the property was their main residence just before they died (or it was deemed to be their main residence under the absence rule)[13] and was not being rented at that time, then:
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the cost base for the executor, the beneficiaries who inherit the property or the surviving joint tenant[14] will be the market value as at the date of death;[15]
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any capital gain when the property is sold is disregarded provided the sale happens within two years of the deceased’s death (or within such longer period allowed by the Commissioner);[16] and
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any capital gain when the property is sold is disregarded provided the sale happens while the property is still being used as a main residence by the deceased’s spouse (regardless of the spouse’s residency status), by someone granted the right to live in the property under the deceased’s will (regardless of the residency status of that individual), or by an individual beneficiary who inherited the property (provided that the individual is not an Excluded Foreign Resident at the time of the sale).[17]
It is important to note if the deceased was an Excluded Foreign Resident at the time of their death then the above concessions are not available to the beneficiary, executor or surviving joint tenant.
In addition, if the deceased was an Excluded Foreign Resident and the residence was not the main residence of the deceased as at the date of their death but was previously their main residence for a period, then the period where the deceased used the property as their main residence will be disregarded and no partial exemption from capital gains tax will apply for the beneficiary, executor or surviving joint tenant in respect of that period.[18]
Impact on Special Disability Trusts
There have also been changes to the law to ensure that the main residence exemption for a special disability trust that holds a property on behalf of a principal beneficiary operates in the same way as it does for individuals.
Broadly the main residence exemption will not apply in the following circumstances:
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if the trustee of a special disability trust sells the property during the principal beneficiary’s lifetime and the principal beneficiary is a foreign resident who does not satisfy the Life Events Test.[19]
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if the trustee of a special disability trust sells the property after the death of the principal beneficiary, if the principal beneficiary was an Excluded Foreign Resident at the time of their death.[20]
Next Steps?
The law in this area is complex and needs to be carefully considered having regard to individual facts and circumstances. It is likely that many Australian citizens who are expatriate workers will be affected by the changes.
If you are or intend to become a foreign resident and are affected by the changes or require assistance with estate planning or asset structuring, you should seek professional legal advice to ensure that you do not unwittingly subject yourself to a tax burden.
Bartier Perry has the necessary expertise and experience to help you reach the outcome best suited to your situation and objectives.
Authors: Lisa To, Peter Kramer and Jeremy Tjeuw
[1] 2017-18 Federal Budget.
[2] Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018.
[3] Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019.
[4] As the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 (Cth).
[5] Regulation 303-10/01 of the Income Tax Assessment Regulations 1997 (Cth) requires two medical practitioners to certify that death is likely to result from the illness or injury within 24 months of certification.
[6] Section 126-5(1) Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
[7] section 118-110 of the Income Tax (Transitional Provisions) Act 1997 (Cth).
[8] section 118-145 ITAA 1997.
[9] sections 115-105 and 115-115 ITAA 1997.
[10] available at https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6439_ems_e7d52c30-b2e6-4db3-9830-e2956635ae28/upload_pdf/720135.pdf;fileType=application%2Fpdf.
[11] sections 115-105 and 115-115 ITAA 1997.
[12] sections 115-105 and 115-115 ITAA 1997.
[13] section 118-145 ITAA 1997.
[14] section 118-197 ITAA 1997.
[15] section 128-15(4) table item 3 ITAA 1997.
[16] section 118-195(1) ITAA 1997.
[17] section 118-195(1) ITAA 1997.
[18] section 118-200(4) ITAA 1997.
[19] section 118-218(5) ITAA 1997.
[20] section 118-225(5) ITAA 1997.